Financial Services Report (1/7)

Good Morning and welcome to 2019. When we last left you the nation was involved in a significant cliff hanger, wondering whether the President and Congress would resolve how to fund the portion of the Federal government that was set to shut down on December 21st. Unfortunately, that drama has continued into the new year with no end in immediate sight.

Under the shadow of the shut down, the most recent iteration of divided government commenced with the swearing-in of the new Congress this past week. Things will be slow for the next few weeks as committees organize and initiate the rudimentary tasks necessary to govern. But once the pro forma rust comes off, we fully anticipate a robust committee schedule — especially in the House. When that happens, we will be sure to cover it all for you here, in your weekly edition of Thorn Run Partners' Financial Services report.

Looking Ahead

Near Term

Congress and the White House continue to negotiate to pass funding for the portions of the government that are shut down.

The Democratic majority may announce some of its Committee assignments as early as this week, though the final rosters may not be set until next week.

Further Out

The President will deliver the State of the Union on January 29th

Once the full rosters are set, the Committees will organize and can begin substantive work.

The Past Week

Legislative Branch

HouseDemocratic Funding Proposal Faces Trump Opposition
On Wednesday, the newly-Democratic House passed two funding bills intended to end the weeks-long partial government shutdown. The first measure—passed with the support of every Democrat and five Republicans—was a continuing resolution that would keep the Department of Homeland Security open until February 8. The second measure—supported by every Democrat and seven Republicans—would fund the other six outstanding appropriations bills through the end of the fiscal year. Regardless, the legislation is not expected to produce a solution to the shutdown after President Trump indicated that he would veto the package given its lack of border wall funding and Senate Majority Leader Mitch McConnell (R-KY) said that the Senate will not consider legislation that does not have the President’s support. In light of the continued stalemate, warnings of a prolonged shutdown escalated this week from Congressional insiders on both sides of the aisle.

The shutdown has affected a variety of agencies operating in the financial services, tax, and trade spaces. Affected agencies include the Departments of Treasury and Housing and Urban Development, as well as the IRS, SEC, CFTC, and Office of the United States Trade Representative. Certain banking regulators that are fee-funded—such as the Federal Reserve, OCC, and FDIC—remain open, as does the CFPB which operates on funding from the Fed.

On Sunday, the House Appropriations Committee released four individual spending bills – effectively companion measures to the spending bills that passed the Senate back in August on a broad bipartisan vote – as part of an effort to keep pressure on the Senate to take up legislation to fund the portions of the government whose funding has lapsed.

House Passes Rules Package
On Thursday and Friday, the House passed its “Rules Package” that among other things, restored the “Gephardt Rule,” a mechanism designed to depoliticize any need to increase the debt ceiling. Other highlights of the rules package was that it overhauled the motion to vacate (the procedure that had been used to force former Speaker Boehner and Ryan into fear of being pushed out by a small majority), as well as repealed dynamic scoring, requires a bill to be posted online for a full 72 hours before being voted on, and created a select task force on global warming. The rules also established that the Financial Services Committee could have 7 subcommittees (up from the current 6) which may mean that the proposed financial services task force could ultimately be a real subcommittee.

While the vote on the rules is often a straight party-line vote, this year three ultra liberal Democrats voted against the measure due to its inclusion of PayGo while three moderate Republicans vote for the proposal because it included reforms advocated by the bipartisan “problem solvers” caucus.

Ways and Means Chair Neal Pumps Breaks on Trump Tax Return Disclosure
On Wednesday, Ways and Means Committee Chairman Richard Neal (D-MA) indicated that he would not pull a legal trigger allowing him to obtain President Trump’s tax returns until February at the earliest. A spokesperson for the Chairman explained that Chairman Neal is inclined to further “lay out a case” for obtaining the President’s returns before formally forcing him to do so. Under a 100-year old, but rarely used statute, Chairs of the House Ways and Means and Senate Finance Committees are able to obtain individual tax returns from the Treasury Department. Although obtaining President Trump’s tax returns have long been a goal of Congressional Democrats in the event of retaking a chamber of Congress, the request would in all likelihood be met with significant litigation and the legal ability of individual members to disclose information contained in the returns remains unclear. A provision in House Democrats’ broad ethics and transparency package—the For the People Act (HR 1) introduced Wednesday—would largely preempt the need for this avenue by requiring presidential and vice presidential candidates to disclose 10 years of tax returns.

Waters Looks to CFPB as Top Chairmanship Priority
On Thursday, recently elevated House Financial Services Committee Chair (HFSC) Maxine Waters (D-CA) participated in an interview with MSNBC in which she identified the Consumer Financial Protection Bureau (CFPB) as one of her top priorities as HFSC Chair. During the interview, Chairman Waters heavily criticized the Bureau’s management under former acting Director Mick Mulvaney, saying “I'm going to focus on that and we're going to try and undo the damage that Mulvaney has done…The last two years have been very dangerous. I have been appalled and surprised at how blatant it has been. This administration is not at all concerned about the welfare of the average family." During the interview, Waters also criticized members of Congress for receiving contributes from major banks, potentially foreshadowing a theme for the coming year.

SenateRepublicans Announce Committee Assignments
On Thursday, Senate Majority Leader Mitch McConnell (R-KY) announced Republican committee assignments for the 116th Congress, and that Senators Kevin Cramer (R-ND) and Martha McSally (R-AZ) will both join the Committee on Banking, Housing, and Urban Affairs, replacing former Sens. Bob Corker (R-TN) and Dean Heller (R-NV). McSally’s addition means that both of Arizona’s Senators will be members of the Banking Committee.

Additionally, it was announced that three Senators—Sens. Steve Daines (R-MT), James Lankford (R-OK), and Todd Young (R-IN) will join the Senate Finance Committee. While two members from the last Congress left, the Committee expanded by one seat reflecting Republicans’ two-seat gain in the chamber.

Select Highlights from the Administration

The White HousePowell Says He Would Not Resign if Asked
On Friday, Federal Reserve Chairman Jerome Powell responded “no” when asked was asked if he would resign if pressured to do so by President Trump. Appearing as part of a panel at the American Economics Association’s annual conference in Atlanta, Chairman Powell also commented that the President has not directly expressed dissatisfaction with him and that there are currently no plans for the two to meet in person. Since elevating him to the Federal Reserve Board’s top spot in February, President Trump has appeared to have soured on the Fed Chairman—calling Fed-driven interest rate hikes the economy’s “only problem” and reportedly asking staff about his authority to fire Chairman Powell.

Federal Deposit Insurance CorporationRegulators Affirm Bank Stability Amid Market Unease
On Thursday, Federal Deposit Insurance Corporation (FDIC) Chair Jelena McWilliams told Reuters that she had no concerns about the health of the banking system despite significant upheaval in equity markets. Echoing similar reassurances made by Comptroller of the Currency Joseph Otting the previous day, Chairwoman McWilliams argued: “Frankly, recent market movements have not given us any reason to be concerned. Banks are well capitalized…Actually, they are superbly well capitalized at this point in time.” The banking regulators’ comments come on the heels of another volatile week for U.S. financial markets—the end of 2018 marked the first year in a decade to see a decline in stock market value and markets experienced another major dip Thursday prior to a rebound Friday driven by news that the economy added 312,000 jobs in December.

Next Week’s Schedule

As of the publication of this newsletter there were no significant events scheduled for next week